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    Southeast Asia
     Oct 3, 2012

Myanmar still a high-risk investment
By Brian McCartan

CHIANG MAI - Internal debate over a pending new foreign investment law has exposed divisions between reformers and conservatives in Myanmar. How the power struggle shakes out will determine in large measure the direction and pace of the country's closely watched economic reform program.

Big multinational corporations, including Coca-Cola, Ford Motor Company and General Electric, have expressed initial interest in Myanmar, a market American companies were until recently banned from entering due to US government imposed economic sanctions. Even with that ban lifted, companies have remained wary about committing funds without stronger legal protection of their investments.

In line with his broad reform agenda, President Thein Sein


announced plans for a more liberal investment regime in late 2011. Since then the law to regulate new foreign investment has undergone several rewrites and heated debate in parliament. The new law is designed to replace the extant and outdated 1988 investment law.

A first draft of the law was sent to parliament in March but was rejected by conservative parliamentarians - some with known links to the business associates of former junta leaders - as overly advantageous to foreign interests. Although full details of the legislation have not yet been made public, earlier drafts reportedly included several restrictions on foreign capital, including bans on foreign investment in as many as 13 sectors.

A series of rewrites since reflects philosophical infighting over how much and how fast to open the economy after decades of political isolation and military mismanagement. While both sides recognize the need to attract more foreign capital, particularly from the West, there are concomitant fears that foreign firms will quickly overwhelm indigenous firms without certain protectionist measures.

The current draft of the law passed parliament on September 7, the last day of the most recent parliamentary session. The draft reportedly upped the foreign ownership limit in allowed sectors to a more liberal 50% from 49% outlined in a previous draft.

It also dropped a controversial US$5 million minimum investment clause, a provision some argued would favor larger, politically connected local firms at the expense of small and medium-sized enterprises (SMEs). The maximum tax holiday for foreigners was raised from three to five years, while foreigners will be allowed to lease land for 50 years with two possible 10-year extensions.

Regulatory powers will be concentrated at the Myanmar Investment Commission (MIC), including discretion over the licensing of foreign firms. The MIC, once renowned for its obstructionist and corrupt practices, is now bidding to reinvent itself as a foreign investor-friendly institution. It's new expanded powers include the authority to withdraw tax incentives and blacklist foreign firms for infractions of the investment law.

The law also reportedly provides a legal guarantee against the nationalization of foreign assets. Although there was a similar provision in the 1988 law, Myanmar nonetheless has a history of state expropriation, including the controversial seizure of the foreign-invested Mandalay Beer joint venture in 1998.

Thein Sein used his prerogative as president to send the previous draft law back to parliament with recommended revisions. Parliament will consider these when it reopens in the third week of October.

Provisions covering land leases, tax holidays and guarantees against nationalization are not expected to change, say analysts monitoring the law's passage. Other key elements, including foreign ownership limits in local ventures, will likely be heavily debated, analysts predict.

Thein Sein reportedly favors more-flexible ownership arrangements, with variable percentage limits on foreign ownership for different business sectors. His camp is also apparently pushing for clearer definitions of the sectors foreign investors will be barred, as well as more specifics on the role foreign investors will be allowed to play in liberalized industries.

The 11 restricted sectors included in the current draft are reportedly down from an original 13 blacklisted areas. Many of them, however, are unclearly defined, according to analysts monitoring the situation. The broad restricted sectors include agriculture, livestock, fishing, production and services. The current draft allows wholly owned foreign businesses in liberalized sectors and a minimum 35% stake in joint ventures.

Foreign tie-ups would give local SMEs, many of which have difficulty securing loans in Myanmar's underdeveloped banking system, access to sorely needed capital and technical expertise. Foreign-invested SMEs would also help to bolster a strata of the economy that many economists believe will be a key driver of future growth.

Big businesses, including those founded and led by cronies of the previous ruling junta's military leaders, are believed to feel threatened by the financial firepower, technical expertise and modern management techniques foreign investors will bring in competing for local markets. They are believed to back the conservative parliamentarians now fighting for more protectionist measures in the investment law.

Military monopolies
Under military rule, this small but powerful group of businessmen were able to leverage their relationships with military leaders to win projects, permits and licenses. Limited competition allowed a select few businessmen to accumulate immense wealth through virtual local monopolies, including in certain extractive industries.

Many of them also benefited from the junta's 2009 fire sale of state assets, a campaign that was dressed up at the time as a privatization of industrial assets but in retrospect more clearly parceled out prime real estate. The campaign also allowed certain senior generals to ensure their economic futures in the new democratic era through the purchase of assets through their families or known crony proxies.

Those businessmen, however, could yet find themselves on the wrong side of history. With the transformation of government from a small group of powerful soldiers to a broader collective of presidential advisors, ministry officials and parliamentarians, many former cronies no longer command privileged access to key decision-makers. More transparent decision-making and government contracts granted by tender rather than as favors also promise to level the competitive playing field.

Moreover, Thein Sein and his government allies have spoken out against the country's endemic corruption, stating their determination to put an end to the old system of opaque privilege. The previous junta's cronies are believed to have lost a valuable protector with the resignation in May of former Vice President-1 Tin Aung Myint Oo, former head of the government's Trade Council and chairman of the military-linked Union of Myanmar Economic Holdings conglomerate.

Certain junta-linked businessmen have recently taken steps to distance themselves from their often murky pasts and rebrand themselves as enthusiastic participants in Thein Sein's economic reform program. Formerly reclusive business leaders, including Zaw Zaw, the country's richest tycoon and owner of the Max Myanmar, and Tay Za, the controversial founder of the Htoo Trading Company, have recently made themselves available for image-burnishing media interviews. Others have openly reached out to the Aung San Suu Kyi-led political opposition - overtures the previous ruling junta would have strictly forbidden.

Whether those moves will be enough to avoid probing questions about how certain businessmen amassed their wealth under military rule is still unclear. Some political analysts believe backward-looking investigations into their past business practices could through court cases result in the confiscation of wealth or even potential imprisonment.

Several businessmen associated with the outgoing junta are still on US Treasury blacklists for their roles in perpetuating military rule. Still others, including the founders of certain major conglomerates, are alleged to have made their initial wealth through narcotics trafficking and other illegal activities.

Private corporate investigators are now awash with due diligence work as image conscious foreign firms try to probe the backgrounds of potential investment partners. The government's new tender system for state contracts, meanwhile, is expected to require local firms to take on foreign partners for certain big ticket projects, including badly needed roadways and other infrastructure.

Political and economic reforms have left the previous junta's business cronies with few options to challenge the new order outside of parliament. The investment law is one area, however, where they are able to lobby parliamentarians for protection from behind the scenes without opening themselves and their business interests to public criticism and scrutiny.

Even with those proposed protections, Myanmar likely lacks the capacity to handle a sudden surge in foreign investment. Nearly five decades of economic mismanagement under military rule has left a legacy of degraded infrastructure, rampant corruption, an dysfunctional financial and government sectors, among other shortcomings.

For foreign investors concerned with reputational risks, there are potential pitfalls of residual human-rights abuses, shady connections between businessmen and military commanders or other individuals involved in criminal activities, and unresolved armed ethnic conflicts.

Even with the passage of a new investment law, foreigners will be subject to Myanmar's notoriously pliable and corrupt judiciary to enforce their contracts and settle local disputes. The judiciary is now widely viewed as a residual power center of the previous junta's old guard. Some analysts believe the legal risks will be amplified for deals done with businessmen still closely linked to former military leaders.

Opposition leader Suu Kyi highlighted this potential pitfall earlier this year at the World Economic Forum when she cautioned that reform and modernization of the judicial system has lagged behind other areas. She has mentioned in other speeches that rule of law remains a key problem throughout the country. And so even if a more liberal investment law is passed, foreign investors will still have plenty of reasons to beware in Myanmar.

Brian McCartan is a freelance journalist. He may be reached at bpmccartan1@gmail.com

(Copyright 2012 Asia Times Online (Holdings) Ltd. All rights reserved. Please contact us about sales, syndication and republishing.)

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